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Corporate Governance Principles: The four-eyes principle and how to apply it correctly
Dual control is one of the fundamental principles of Corporate Governance. It emphasizes the need for key decisions to be made not by a single person but by at least two people working together. This article outlines how the four-eyes principle is put into practice and why it is one of the most important principles of Corporate Governance.
What are the objectives of the four-eyes principle?
Implementing the four-eyes principle aims to minimize errors and protect against malpractice in critical, governance-relevant processes. Bank transfers are a good example: According to the four-eyes principle, every bank transfer should be approved by a second person, another pair of eyes. This additional level of accountability makes the abuse of company funds more difficult.
💡 The relevance of the topic becomes clear in this case from Nuremberg: In March 2022, the Nuremberg Higher Regional Court sentenced a managing director to pay damages of EUR 800,000 because he did not implement this principle in relevant business areas.
Where is the dual control principle to be applied?
The four-eyes principle should be applied wherever there is a particular risk of personal injury or financial loss. Typically, these are departments such as Finance and Purchasing. Companies should apply the four-eyes principle, particularly to decisions made by the management board. Another critical step is to properly document the application of the four-eyes principle so that an objective third person or external auditor can assess it.
Who is responsible for implementation?
Managing Directors and Board Members play a crucial role in recognizing and implementing the four-eyes principle throughout the company. They also face a greater responsibility as they would be personally liable if financial losses occur. Implementing the four-eyes principle is vital to mitigate this risk.
Once critical areas and decision-making processes are identified, it is crucial to record when and how one must obtain another person's approval. Persons involved should carefully document compliance with the four-eyes principle. This documentation is vital in case of an internal investigation or legal battles in the future. It will be crucial in assessing management members' or decision maker's (co-)liability in any of these cases.
The legal department, particularly the General Counsel, should regularly monitor if the four-eyes principle is implemented across all governance-relevant processes and make suggestions for optimizing the approval workflows and their documentation. It is also his task to remind decision-makers to comply if necessary.
How can I put the basic principles of corporate governance into practice?
The four-eyes principle is a crucial component of good Corporate Governance.
It is quite simple to implement and not a great deal of work for the decision-makers involved. Otherwise, there is a risk that the rest of the company will not follow through with the strict application and neglect the principle. Software solutions like Fides offer practical tools for seamlessly integrating decision-making and approval processes into internal workflows. Each process, decision, and approval can be documented individually with time stamps and all associated information and documents. This way, transparency and traceability are ensured.
Using tools like Fides makes it easy to implement Corporate Governance principles, such as the four-eyes principle: simple, smooth, and secure. At the same time, it enables the legal department to track compliance, even years later.
Summary
- The four-eyes principle requires that important, governance-relevant decisions are made by at least two persons together.
- The four-eyes principle aims to minimize fraud, abuse, and mistakes.
- This principle should be applied wherever there is an increased risk of employees suffering injury or financial loss.
- It is important to record the internal processes and document compliance with the four-eyes principle.
- The legal department is central in setting up, monitoring, and maintaining the four-eyes principle.
You can find more information on the dual control principle here in our YouTube video.
